Organigram Q4 Financial Results: Room to Grow

Organigram Holdings Inc. (TSX:OGI), one of the Canadian marijuana stocks, reported fourth-quarter financial results on November 25, 2019

SmallCapPower | November 26, 2019:Organigram Holdings Inc. (TSX:OGI) (NASDAQ:OGI), one of the Canadian cannabis stocks, reported Q4/19 financial results before markets opened on November 25, 2019. Results included a net loss of $22.5M on net revenue (excluding excise taxes) of $16.3M, and an adjusted EBITDA loss of $7.7M. Revenue was in-line with consensus estimates as management had provided guidance on November 11, but OGI missed on net loss and adj. EBITDA estimates of $ -1.6M and $1.5M, respectively.

Net cannabis revenue declines 34% sequentially. Q4/19 net revenue sank by 34% to $16.3M (was $24.7M during Q3/19), due primarily to poor retail store roll-out particularly in Ontario and Quebec. Canadian adult-use sales represented $13.4M and medical sales were $2.4M, comprised of 2,425 kg of dry flower and 3,131 liters of cannabis oil. Management estimates that its year-to-date market share in the Canadian adult-use market is ~10% based on public data and data received from provincial cannabis control boards.

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Gross margins contracted by 94%. Gross margins fell to 4.6% from 49.6% during the third quarter, due largely to lower net revenue and higher costs of sales and indirect production costs. Cost of sales increased 25% to $15.5M, as a result of higher-cost products sold in the fourth quarter and $1.6M in inventory write-offs related to expired products. As such, management views the poor margins as a one-off and expects margins to normalize in subsequent quarters. Of note, cash cost per gram and all-in cash cost per gram decreases by 31% and 27%, to $0.66 and $0.94 (was $0.95 and $1.29). On the earnings call, management guided for lower cost of sales and higher revenue for Q1/20, as cost of cultivation declined and yield per plant increased (148 grams/plant), as well as improvements in sequential SG&A.

Organigram halts construction of Moncton facility. OGI has a current production capacity of 76,000 kg and expects to receive approval for an additional 10,000 shortly. Consequently, the Company has paused remaining construction of Phase 4 build-out of its Moncton facility, as management believes it has adequate supply in the short-to-medium term until the market matures. As well, Organigram is expecting to have additional extraction and a vape cartridge filling complete by the end of the calendar year. The Company is ready to start selling vapes in mid-December.

Key takeaways. Product returns hit Organigram hard this quarter, as it did with other Canadian cultivators. Canopy Growth Corp had negative gross margins, due to $32.7M in returned product and $14.3M in inventory write downs. But cannabis is still a nascent industry and cultivators are trying to determine consumer preferences, which could take some trial and error. Pausing construction of the Moncton facility is financially prudent, as it requires ~$30M in capex. OGI does not need the additional capacity for the time being, as it produced ~3,000 kg equivalents last quarter, harvest ~7,500 kg and has a capacity of 19,000 kg per quarter. Thus, OGI is currently only utilizing 40% of its capacity/quarter and selling 16% of what they can grow. Organigram is expected to report Q1/20 financial results, ending November 30/19 on or about January 15/20. Analysts are expecting a net loss of $0.6M on revenue of $21.2M, and $2.9M in adj. EBITDA.

Organigram closed Monday’s trading session down 3.1% to C$3.39. Shares of Organigram are currently trading at a market cap of C$546.5M.

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